The Chancellor announced further reductions in the corporation tax rate applying to profits arising in UK companies - falling from 20% to 19% in 2017 and 18% in 2020. He also announced changes in the tax rates applicable to dividends with the intention of deterring businesses from incorporating for tax reasons. In addition, companies in which the only employee is the director will no longer be entitled to claim the NIC employment allowance.

Dividend tax changes

From 6 April 2016, the dividend tax credit for individuals will be abolished and will be replaced with a new tax-free £5,000 dividend allowance. Dividend income in excess of this allowance will be taxed at the following rates:

  • 7.5% (basic rate)

  • 32.5% (higher rate) as opposed to the existing effective 25% tax charge

  • 38.1% (additional rate) as opposed to the existing effective 30.56% tax charge.

The Treasury anticipates that those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax while 85% of those who receive dividends will see no change or will be better off. Company owners may therefore wish to consider taking accelerated dividends before the change is introduced next year as well as reviewing the way in which they are remunerated in the future.

This measure will be introduced in the Finance Bill 2016. However, there will be a consultation in the autumn on the taxation of company distributions generally, so it is possible that further changes will be made to the regime in this Finance Bill.

It is, however, worth highlighting that dividends paid within pensions and ISAs will remain tax-free and unaffected by these changes.